A security deposit is an advance rental payment that is usually collected by the landlord prior to or at the time the tenant moves into the property. The purpose of security deposits is to protect the landlord in case the tenant damages the property.
The security deposit will cover the costs of excessive repairs to the unit after the tenant moves out. Landlords cannot deduct money for security deposits for normal wear and tear. Most states have strict guidelines as to how and when landlords must return security deposits. Typically landlords must return security deposits within 14 to 30 days after the tenant vacates the premises. Landlords are subject to strict penalties if they violate these laws.
Most cities have limits on the amount of security deposit a landlord can collect. The general rule of thumb is not more than two months rent as a security deposit. This limit is reduced to one month's rent if a tenant is 62 years of age or older in some cities that have senior rent control laws. If the property is furnished, then not more than three months rent can be collected in advance. Also, pet deposits may be required to be included as part of the security deposits. Some cities do not allow an additional amount for pet deposits. You need to check your city rent laws.
Most often, it is not legal to charge more than two months rent at any one time, so it can be designated first and last or first month and security. Generally the landlord cannot charge, first month, last month and a security deposit unless the unit is furnished, then the landlord can charge up to three months rent. A security deposit cannot be used towards a last month rent so if you pay the first month rent and a security deposit, you will need to pay your last month rent and wait for the landlord to return your security deposit unless you and the landlord negotiate otherwise.
If the rent has increased, the landlord can also increase the security deposit to equal the same amount as the rental increase.
Landlords do not have to pay interest on deposits, but they do need to deposit the money in a trust account separate from the general and personal funds. If they do agree to pay interest, it must be at least the same amount as an average commercial bank or savings loan pays their depositors on savings accounts determined and published by the Banking Commissioner. Some cities require that interest must be paid annually on the anniversary date of the tenancy either directly to tenants or as a credit towards the tenant's next month's rent.
Landlords/owners may collect nonrefundable lease option payments from tenants/buyers if the tenant has negotiated a lease option to purchase the property at a later date. A landlord may also collect a nonrefundable cleaning fee. Nonrefundable deposits must be distinguished in writing in the lease separate from security deposits. Nonrefundable security deposits are against the law.
If the building is sold, the landlord must return the security deposit or transfer it to the new owner. Generally it is transferred to the new owner. If neither event happens, then the old and new landlords are responsible for returning the tenant's deposit.